Poverty, Capital and Economic Freedom

by Victor V. Claar

When poor countries grow rich, it rarely has anything at all to do with how many mouths they have to feed or the abundance of natural resources. Instead, across the globe, poor countries of all sizes, climates, and endowments begin to grow rich as two key factors increase.

First, countries grow rich as their human capital improves. Human capital is the term economists use to describe the value that a country’s people possess through their accumulated experience and education. For example, there is little doubt that India’s recent growth explosion is due in large part to the education—including the knowledge of the English language—of its people.
Second, countries grow rich as they invest in and accumulate physical capital: the machines, tools, infrastructure, and other equipment that make the product of each hour of physical labor more valuable.
That which both human capital and physical capital share is that they both transform the result of an hour of a person’s hard work into something of even greater value. As the value of an hour of labor rises, employers gladly pay higher hourly rates, knowing that their bottom lines will be the better for it.

If we want to be effective agents in aiding the poor, we should focus our efforts in directions leading to the enhanced value of an hour of labor. That is, we should help poor countries wisely grow their stocks of human and physical capital, all the while bearing in mind that markets and their prices send the best available signals regarding where our efforts can have the greatest impact. The newfound success of innovative micro lending efforts such as Kiva can help show us ways to effectively invest in the accumulation of physical capital by the global poor. Compassion International is a marvelous organization that works to further the education—the human capital—of poor children worldwide, with a financial accountability record above reproach.

Further, markets work best when economic systems maintain the dignity of human beings. First, human beings grow and flourish—and accumulate human and physical capital—in systems that afford them considerable economic freedom. Economic freedom means that people are able to make personal choices, that their property is protected, and that they may voluntarily buy and sell in markets. Yet, economic freedom requires the protection of private property. When property rights are clearly defined and protected, people will work harder to create and to save. When they are confident that the fruits of their labors cannot be taken away arbitrarily or by force, people everywhere have greater assurance that their labors will lead to better lives for themselves and their families. Today’s rich collection of NGOs that work toward basic human rights play a critical role in this regard.

Finally, we should be outraged at the protectionist agricultural policies of already-rich nations such as the United States. When we allow the agricultural lobby to garner sweetheart deals from the U.S. House and Senate, the poor in other nations simply cannot compete with American growers of many crops because the trade rules are so utterly slanted against those in other nations.

For example, it is illegal for sugar buyers in the United States to purchase their sugar from sources outside the United States, even though the world price of sugar lies below the federally mandated price of sugar in the United States. This is wonderful, though, for U.S. sugar beet growers in the United States; it means they have a captive supply of buyers at a price that is being kept artificially high by federal decree. If the United States were to abandon such self-centered policies, sugar growers everywhere would have access to our markets, and the price of sugar would fall for all of us.

Moreover, confectioners and soft-drink makers in the United States would be able to produce their goods at lower costs, thereby adding to their job security. In one well publicized case in 2002, the Life-Savers candy factory in Holland, Michigan, was relocated to Canada, though the Michigan factory had been in operation for over thirty-five years and employed six hundred or so American workers. By moving to the northern side of the U.S.-Canada border, Life Savers slashed its input costs dramatically because, in Canada, Life-Savers was free to buy cane sugar at the world price: sugar grown by those who need the income most.

Sugar is not the only market we currently protect to keep out lower-priced commodities in an effort to help poor farmers in the United States. We have erected similar barriers that turn a blind eye to the plight of the global poor in markets for cotton, peanuts, and several other products that we can grow at home. In fact, by now you can probably see another reason why coffee prices are low. Because coffee cannot be grown in Ohio, or in France, rich northerners have not erected protectionist barriers to keep out the coffee that foreigners make.

If we really care about the global poor, we should work to make trade freer for everyone in our global community: a level playing field for all. That means tearing down all of the barriers we use to keep the global poor from working in the very jobs in which they are perfectly positioned to make the greatest lasting gains.